QNB ALAHLI S.A.E (Egyptian Joint Stock Company) Separate Financial Statements Together With Limited Review Report

Transcription

1 (Egyptian Joint Stock Company) Separate Financial Statements Together With Limited Review Report For The Period Ended June 30, 2018 KPMG Hazem Hassan Public Accountants & Consultants Allied for Accounting and Auditing EY Public Accountants & Consultants

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3 Separate Statement of Financial Position As at 30 june 2018 Note June 30, 2018 December 31, 2017 Assets: Cash and due from Central Bank of Egypt (CBE) (15) 13,540,091,189 15,394,019,991 Due from banks (16) 15,704,235,498 15,351,758,544 Treasury bills (17) 39,412,599,628 34,954,481,837 Loans and credit facilities to customers, net (18) 123,915,578, ,015,038,296 Financial Investments: Availableforsale (20) 2,374,100,915 2,697,935,760 Held to maturity (20) 33,358,276,649 31,297,090,056 Investments in subsidiaries and associates (21) 292,109, ,109,089 Intangible assets (22) 135,609, ,919,735 Other assets (23) 2,899,799,902 4,216,430,365 Deferred tax assets (30) 184,086, ,514,511 Property and Equipment (24) 2,148,223,182 2,107,761,025 assets 233,964,710, ,606,059,209 Liabilities and equity: Liabilities: Due to banks (25) 9,727,412,404 3,741,942,711 Customer deposits (26) 193,769,037, ,676,655,164 Financial derivatives (19) 37,719,410 5,619,598 Other loans (27) 2,651,689,298 1,768,109,118 Other liabilities (28) 2,366,139,570 2,652,467,654 Other provisions (29) 734,837, ,007,098 Current income tax payable 332,363,312 1,651,350,976 Defined benefits obligation (31) 407,120, ,403,368 liabilities 210,026,320, ,796,555,687 Equity: Issued and paidup capital (32) 8,904,227,140 8,904,227,140 Reserves (33) 11,348,487,902 7,613,528,532 Profit for the period / year and retained earnings (33) 3,685,675,560 5,291,747,850 equity 23,938,390,602 21,809,503,522 liabilities and equity 233,964,710, ,606,059,209 Mohamed Osman ElDib Chairman and Managing Director The accompanying notes from (1) to (37) are an integral part of these Separate Financial Statements. (Limited review report attached). 3

4 Separate Income Statement Note From April 01, 2018 From January 01, 2018 From April 01, 2017 From January 01, 2017 To June 30, 2018 To June 30, 2018 To June 30, 2017 To June 30, 2017 Interest on loans and similar income Cost of deposits and similar expense (6) 7,261,558,099 14,440,856,973 5,833,009,729 11,097,051,557 (6) (4,643,101,192) (9,571,799,357) (3,782,565,493) (7,124,980,097) Net interest income 2,618,456,907 4,869,057,616 2,050,444,236 3,972,071,460 Fee and commission income Fee and commission expense Net interest, fee and commission income (7) 564,307,957 1,134,027, ,276, ,336,168 (7) (93,350,941) (177,251,438) (57,154,824) (112,428,129) 3,089,413,923 5,825,833,278 2,479,566,342 4,833,979,499 Dividend income (8) 9,793,063 22,018,006 10,879,265 14,561,148 Net trading income (9) 4,325,202 22,903,145 28,456,443 26,224,123 Gain / Loss on financial investments (20) 58,515,645 59,235,255 80, ,880 Impairment credit losses (12) (65,020,784) (119,085,977) (69,093,359) (271,600,954) Administrative expenses (10) (664,813,540) (1,305,074,196) (549,255,899) (1,074,043,890) Other operating revenues (expenses) (11) (2,160,396) (33,468,721) (88,643,125) (184,478,056) Profit before income tax 2,430,053,113 4,472,360,790 1,811,989,952 3,345,557,750 Income tax expense (13) (641,566,916) (1,181,844,139) (409,663,397) (762,790,116) Net profit for the period 1,788,486,197 3,290,516,651 1,402,326,555 2,582,767,634 Earnings per share (14) Mohamed Osman ElDib Chairman and Managing Director The accompanying notes from (1) to (37) are an integral part of these Separate Financial Statements. 4

5 Separate Statement Of Changes In Equity Issued and Paid Up Capital Legal Reserve General Reserve Special Reserve Capital Reserve Availableforsale Investments Revaluation Reserve General Banking Risk Reserve IFRS 9 Reserve Retained Earnings Net Profit for the Year / Period June 30, 2017 Balance at 1 January ,420,189, ,487,038 5,262,955, ,044,179 10,113,989 (1,213,046,380) 7,149, ,018,624 4,033,593,215 16,632,504,678 Transfer to reserves and retained earnings 201,679,520 3,548,018,596 2,821 (143,018,624) (3,606,682,313) Remuneration for board members and Employees' profit share from Profit distribution for year 2016 Net unrealized gain / (loss) on availableforsale investments Revaluation Reserve, after deducting gains recycled to profit or loss relating to sold availableforsale investments as well as taxes Note No. 33 (426,910,902) (426,910,902) 182,106, ,106,433 Net profit for the period 2,582,767,634 2,582,767,634 Balance at 30 June ,420,189,290 1,023,166,558 8,810,973, ,044,179 10,116,810 (1,030,939,947) 7,149,353 2,582,767,634 18,970,467,843 June 30, 2018 Balance at 1 January ,904,227,140 1,023,166,558 7,326,936, ,044,179 10,116,810 (902,709,151) 8,974,020 5,291,747,850 21,809,503,522 Transfer to reserves and retained earnings 264,581,718 2,094,574,293 1,938,155 1,282,925, ,158,909 (4,039,178,708) Dividend distributions for year 2017 (1,252,569,142) (1,252,569,142) Net unrealized gain / (loss) on availableforsale investments Revaluation Reserve, after deducting gains recycled to profit or loss relating to sold availableforsale investments as well as taxes Note No ,939,571 90,939,571 Net profit for the period 3,290,516,651 3,290,516,651 Balance at 30 June ,904,227,140 1,287,748,276 9,421,510, ,044,179 12,054,965 (811,769,580) 8,974,020 1,282,925, ,158,909 3,290,516,651 23,938,390,602 The accompanying notes from (1) to (37) are an integral part of these Separate Financial Statements. 5

6 Separate Statement of Cash Flows Cash flows from operating activities Note June 30, 2018 June 30, 2017 Profit before tax 4,472,360,790 3,345,557,750 Adjusted by: Property and Equipment depreciation and Intangible assets amortization 116,672, ,032,247 Impairment credit losses (12) 119,085, ,600,954 Loans written off during the period (5,734,960) (8,977,982) Recovery from loans previously written off 22,503,353 36,557,951 Net formed / (reversed) other provisions (735,875) 92,334,756 Utilized provisions other than loans provision (649,389) (4,437,867) Translation differences of other provisions in foreign currencies 650,766 (1,465,649) Translation differences resulting from monetary foreign currency investments (28,104,609) (123,604,286) Amortization of premium / discount for bonds (31,942,875) (164,316,102) (Gain) on sale of Property and Equipment (1,343,338) (520,600) Dividend income (8) (22,018,006) (14,561,148) (Gain) on sale of Availableforsale investments (20) (59,235,255) (915,880) Operating profits before changes in assets and liabilities resulting from operating activities 4,581,509,499 3,537,284,144 Net decrease / increase in assets and liabilities Due from banks 243,366,258 (1,118,269,425) Treasury bills 159,007,054 7,568,322,730 Loans and credit facilities to customers (11,036,394,776) (8,800,849,930) Financial derivatives 32,099,812 62,787,731 Other assets (206,600,500) (560,734,039) Due to banks 5,985,469,693 3,420,481,524 Customer deposits 7,092,382,822 4,551,447,078 Other liabilities (286,328,084) 257,915,428 Defined benefits obligation 41,717,316 31,282,126 Income tax paid (1,179,256,766) (1,315,419,630) Net cash flows resulting from operating activities (1) 5,426,972,328 7,634,247,737 Cash flows from investing activities Acquisition of Property and Equipment and branches preparation (177,012,389) (269,134,419) Proceeds from sale of Property and Equipment 1,530, ,600 Proceeds from financial investments other than held for trading investments 2,012,022,550 2,121,438,190 Acquisition of financial investments other than held for trading investments (3,550,161,047) (6,483,289,652) Dividends received 14,675,929 13,777,736 Net cash flows used in investing activities (2) (1,698,944,111) (4,616,687,545) Cash flows from financing activities Other loans 883,580,180 (2,073,065,276) Dividends paid (1,252,569,142) (426,910,902) Net cash flows used in financing activities (3) (368,988,962) (2,499,976,178) Net increase in cash and cash equivalents during the period (1+2+3) 3,359,039, ,584,014 Cash and cash equivalents at the beginning of the year 18,472,770,617 13,553,071,373 Cash and cash equivalents at the end of the period (34) 21,831,809,872 14,070,655,387 Cash and cash equivalents at end of the period are represented in : Cash and due from Central Bank of Egypt (15) 13,540,091,189 13,056,320,015 Due from banks (16) 15,704,235,498 11,057,377,918 Treasury bills 39,412,599,628 30,280,625,603 Balances with Central Bank of Egypt (mandatory reserve) (8,740,579,770) (8,938,714,853) Balances due from banks with maturities more than 3 months (3,644,390,000) (1,429,482,988) Treasury bills with maturity more than 3 months (34,440,146,673) (29,955,470,308) Cash and cash equivalents at end of the period 21,831,809,872 14,070,655,387 The accompanying notes from (1) to (37) are an integral part of these Separate Financial Statements. 6

7 1. Background: QNB ALAHLI "S.A.E" was incorporated as an investment and commercial bank on April 13, 1978, in accordance with the provisions of the Investment Law no 43 of 1974 and its executive regulations and the amendments thereon. The Bank provides all banking services related to its activity, through its Head Office located in 5 Champlion Street Downtown Cairo and its 216 branches served by 6,102 staff at the date of the financial statements. The Bank is listed on the Egyptian Stock Exchange (EGX). These Financial statements were approved by the Board of Directors on July 11, Summary of significant accounting policies: 2.1 Basis of preparation of the separate financial statements These separate financial statements have been prepared in accordance with the instructions of the Central Bank of Egypt (CBE) rules approved by its Board of Directors on 16 December 2008; to under the historical cost convention, as modified by the measurement of financial assets and financial liabilities at fair value or amortized cost, as appropriate, including financial assets designated at fair value through profit or loss, availableforsale financial assets, as well as all financial derivative instruments. These separate financial statements have been prepared in accordance with the applicable laws of Egypt. The separate and consolidated financial statements of the Bank and its subsidiaries have been prepared in accordance with the instructions of the Central Bank of Egypt (CBE) rules, the affiliated companies are entirely included in the consolidated financial statements and these companies are the companies that the Bank directly or indirectly has more than half of the voting rights or has the ability to control the financial and operating policies, regardless of the type of activity, the Bank s consolidated financial statements can be obtained from the Bank's management. The Bank accounts for investments in subsidiaries and associate companies in the separate financial statements at cost minus impairment loss. The separate financial statements of the Bank should be read with its consolidated financial statements, for the period ended on June 30, 2018 to get complete information on the Bank s financial position, income satatment, cash flows and change in shareholders equity. 2.2 Accounting for Investments in subsidiaries and associates Investments in subsidiaries and associates are presented in the attached separate financial statements using the cost method which represents the bank s direct share in ownership and not according to the business results and the net assets of the investees. And the consolidated financial statements provide a wider understanding for the consolidated financial position, business results and the consolidated cash flows for the bank and its subsidiaries (The Group), including the bank s share in the net assets of its associate companies Investments in subsidiaries Subsidiaries are entities (Including Special Purposes Entities / SPEs) which the bank exercises direct or indirect control over its financial and operating policies in order to get benefits from its activities and usually have an ownership share of more than half of its voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the bank has the control over its investees Investments in associates Associates are entities over which the bank exercises significant influence directly or indirectly, but without exercising control or joint control, where the bank holds 20% to 50% of voting rights in the associate. The purchase method is used to account for the bank's purchases of subsidiaries and associates when they are initially recognized; the acquisition date is the date on which the acquirer obtains control or significant influence of acquiree subsidiary or associate. According to the purchase method, the investments in subsidiaries and associates are initially recognized at cost (which may be incorporated goodwill). The acquisition cost represents the fair value of the consideration given in addition to the other acquisition related costs. In business combination achieved in stages, and business combination achieved through more than one transaction, is then dealing with every transaction of such transactions that separately on the basis of the acquisition consideration and fair value information at the date of each transition until the date where the control are achieved. The investments in subsidiaries and associates are subsequently accounted for using the cost method on the separate financial statements. According to the cost method; investments are recognized at acquisition cost less any impairment losses in valueif any. Dividends are recognized as revenue in the separate income statement when they are declared and the bank's right to collect them has been established. 7

8 2.3 Segment reporting An operating segment is a group of assets and operations providing products or services whose risks and benefits are different from those associated with products or services provided by other operating segments. A geographical segment provides products or services within a specific economic environment characterized by risks and benefits different from those related to other geographical segments operating in a different economic environment. The Bank is divided into two main business lines, which are corporate banking and retail banking. In addition, a corporate center acts as a central funding department for the bank s core businesses. The dealing room, proprietary activity and other noncore businesses are reported under the corporate banking business line. For the purpose of preparation of segment reporting by geographical region, segment profit and loss and assets and liabilities are presented based on the location of the branches. Given that the bank does not have any entity abroad, and unless otherwise stated in a specific disclosure, all equity and debt instruments of the bank issued by foreign institutions and credit facilities granted to foreign counterparties are reported based on the location of the domestic branch where such assets are recorded. 2.4 Foreign currency translation Functional and presentation currency The separate financial statements of the bank are presented in the Egyptian pound which is the bank s functional and presentation currency Transactions and balances in foreign currencies The Bank maintains its accounting records in Egyptian pounds. Transactions in foreign currencies during the period are translated into the Egyptian pounds using the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at end of reporting period at the exchange rates then prevailing. Foreign exchange gains and losses resulting from settlement and translation of such transactions and balances are recognized in the income statement and reported under the following line items: Net trading income from held for trading assets and liabilities. Other operating revenues (expenses) from the remaining assets and liabilities. Changes in the fair value of investments in debt instruments; which represent monetary financial instruments, denominated in foreign currencies and classified as availableforsale assets are analyzed into differences resulting from changes in the amortized cost of the instrument, differences resulting from changes in the applicable exchange rates and differences resulting from changes in the fair value of the instrument. Differences resulting from changes in the amortized cost are recognized and reported in the income statement in "Interest on loans and similar income" whereas differences resulting from changes in foreign exchange rates are recognized and reported in "Other operating revenues (expenses)". The remaining differences resulting from changes in fair value are recognized in equity and accumulated in the "Availableforsale investments revaluation reserve". Valuation differences arising on the measurement of nonmonetary items at fair value include gains or losses resulting from changes in foreign currency exchange rates used to translate those items. fair value changes arising on the measurement of equity instruments classified as at fair value through profit or loss are recognized in the income statement, whereas total fair value changes arising on the measurement of equity instruments classified as availableforsale financial assets are recognized directly in equity in the "Availableforsale investments revaluation reserve". 2.5 Financial assets The Bank classifies its financial assets into the following categories: Financial assets classified as at fair value through profits or loss, loans and receivables, held to maturity financial assets, and availableforsale financial assets. The classification depends on the nature and purpose of the financial assets and is determined by management at the time of initial recognition Financial assets designated at fair value through profit or loss This category includes financial assets held for trading and financial derivatives. A financial instrument is classified as an instrument held for trading if it is primarily acquired for the purpose of the sale in the short term or if it represents a part of a portfolio of specific financial instruments that are managed together and there is evidence of recent actual transactions that resulted in shortterm profit taking, or it is a derivative that is not designated and effective as a hedging instrument Loans and receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market, other than the following: Assets which the bank intends to sell immediately or in the short term. In which case, they are classified as assets held for trading or assets classified at inception at fair value through profit and loss. Assets classified as availableforsale at initial recognition. Assets for which the bank will not be able to substantially recover the value of its initial investment for reasons other than credit worthiness deterioration. 8

9 2.5.3 Held to maturity financial assets Held to maturity financial assets are nonderivative financial assets with fixed or determinable amount and fixed maturity dates that the bank has the positive intent and ability to hold to maturity. The bank should not classify any financial assets as held to maturity if the bank has, during the current financial period or during the two preceding financial years, sold or reclassified more than an insignificant amount of held to maturity investments before maturity other than those allowed in specific circumstances Availableforsale financial assets Availableforsale financial assets are those nonderivative financial assets intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The following is applied in respect of all financial assets: Regularway purchases and sales of financial assets classified as at fair value through profit or loss, loans and receivables, held to maturity and availableforsale are recognized at the settlementdate, which is the date that an asset is delivered to or by the entity. All financial assets, other than those classified as at fair value through profit or loss, are initially recognized at fair value plus transaction costs. Financial assets classified as at fair value through profit or loss are initially recognized at fair value. Transaction costs associated with those assets are recognized in the income statement in "Net trading income". The Bank derecognizes a financial asset only when the contractual rights to the cash flows from the financial asset expire or when the bank transfers the financial asset and all the risks and rewards associated with the ownership of the asset to another entity. Financial liabilities are derecognized when they are extinguished; that is when the obligation is discharged, cancelled or it expires. Availableforsale and financial assets designated at fair value through profit or loss are subsequently measured at fair value. Loans and receivables and held to maturity investments are subsequently measured at amortized cost. Gains and losses arising from changes in the fair value of the financial assets classified as at fair value through profit or loss are recognized in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of availableforsale financial assets shall be recognized directly in equity, until the financial asset is derecognized or impaired, at which time, the cumulative gain or loss previously recognized in equity shall be recognized in the income statement. Interest income calculated using the amortized cost method, and gains and losses arise from the foreign currency on monetary financial assets classified as availableforsale financial investments shall be recognized in the income statement. Dividends resulted from the equity instruments classified as availableforsale shall be recognized in the income statement when the entity s right to receive payment is established. 2.6 Offsetting of financial assets and financial liabilities 2.7 Financial derivatives and hedge accounting Hedging instruments of the risks associated with fair value changes of recognized assets or liabilities or firm commitments (fair value hedge). The fair value of quoted investments in an active market is based on current bid prices. If there is no active market for a financial asset, it is measured at cost less of any impairment losses. Financial assets and liabilities are offset when the bank has a legally enforceable right to offset the recognized amounts and it intends to settle these amounts on a net basis, or realize the asset and settle the liability simultaneously. Items of purchase agreements of treasury bills with the obligation to resell and sale agreement of treasury bills with the obligation to repurchase (repos and reverse repos) are shown net in the financial position under the item of treasury bills. Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Fair values are determined based on quoted market prices in active markets, including recent market transactions, or valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All derivatives are recognized as assets when their fair value is positive and as liabilities when their fair value is negative. Embedded derivatives, such as the conversion option in a convertible bond, are treated as separate derivatives if they meet the definition of a financial derivative, and when their economic characteristics and risks are not closely related to those of the host contract, provided that the host contract is not classified as at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognized in the income statement "Net trading income" ;unless the bank chooses to designate the hybrid contract as a whole as at fair value through profit or loss. The timing of recognition in profit or loss, of any gains or losses arising from changes in the fair value of derivatives, depends on whether the derivative is designated as a hedging instrument, and the nature of the item being hedged. The parent bank designates certain derivatives as: Hedging of risks relating to future cash flows attributable to a recognized asset or liability or a highly probable forecast transaction (cash flow hedge). Hedge accounting is used for derivatives designated in a hedging relationship when the following criteria are met. At the inception of the hedging relationship, the bank documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the bank documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. 9

10 2.7.1 Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized immediately in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of the interest rate swaps and the changes in the fair value of the hedged item attributable to the hedged risk are recognized in profit or loss. Additionally, interest differential on interest rate swaps is recognized in profit or loss as part of "Net interest income" line item in the income statement. Any ineffectiveness is recognized in profit or loss in "Net trading income". When the hedging instrument no longer qualifies for hedge accounting, the adjustment to the carrying amount of a hedged item, measured at amortized cost, arising from the hedged risk is amortized to profit or loss from that date to maturity of the asset using the effective interest method. Adjustment to the carrying amount of a hedged equity instrument that has been deferred in equity remains in equity until the asset is derecognized Cash flow hedge The effective portion of changes in the fair value of derivatives designated and effective for cash flow hedge is recognized in equity while changes in fair value relating to the ineffective portion is recognized immediately in the income statement in "Net trading income". Amounts accumulated in equity are transferred to income statement in the relevant periods when the hedged item affects the income statement. The effective portion of changes in fair value of interest rate swaps and options are reported in "Net trading income". When a hedging item expires, or is sold or if hedging instrument no longer qualifies for hedge accounting requirements, gains or losses that have been previously accumulated in equity remain in equity and are only recognized in profit or loss when the forecast transaction ultimately occurs. If the forecast transaction is no longer expected to occur, any related cumulative gain or loss on the hedging instrument that has been recognized in equity shall be reclassified immediately to profit or loss Derivatives that do not qualify for hedge accounting Where a derivative instrument does not qualify for hedge accounting, changes in fair value of that derivative and related interest are recognized immediately in the income statement in "Net trading income" line item. However, gains or losses arising from changes in fair value of derivatives that are managed in conjunction with financial assets or financial liabilities, designated upon initial recognition at fair value through profit or loss, are included in "Net income from financial instruments designated upon initial recognition as at fair value through profit or loss". 2.8 Interest income and expense Interest income and expense on all interestbearing financial instruments, except for those classified as held for trading or designated as at fair value through profit or loss, are recognized in "Interest income" and "Interest expense" line items in the income statement using the effective interest rate method. The effective interest rate is a method of calculating the amortized cost of a debt instrument whether a financial asset or a financial liability and of allocating its interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial debt instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability on initial recognition. When calculating the effective interest rate, the bank estimates the future cash flows, considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Interest income on loans is recognized on an accrual basis except for the interest income on nonperforming loans, which ceases to be recognized as revenue when the recovery of interest or principle is in doubt. Interest income on nonperforming or impaired loans and receivables ceases to be recognized in profit or loss and is rather recorded offbalance sheet in statistical records. Interest income on these loans is recognized as revenue on a cash basis as follows: 1 For retail loans, personal loans, small and medium business loans, real estate loans for personal housing and small loans for businesses, when interest income is collected and after recovery of all arrears. 2 For corporate loans, interest income is recognized on a cashbasis after the bank collects 25% of the rescheduled installments and provided these installments continue to be paid for at least one year. If a loan continues to be performing thereafter, interest accrued on the principal then outstanding starts to be recognized as revenues. Interest that is marginalized prior to the date when the loan becomes performing is not recognized in profit or loss except when the total balance of loan, prior to that date, is paid in full. 2.9 Fees and commission income Fees charged for servicing a loan or facility that is measured at amortized cost, are recognized as revenue as the service is provided. Fees and commissions on nonperforming or impaired loans or receivables cease to be recognized as income and are rather recorded off balance sheet. These are recognized as revenue on a cash basis only when interest income on those loans is recognized in profit or loss, at which time, fees and commissions that are an integral part of the effective interest rate of a financial asset are treated as an adjustment to the effective interest rate of that financial asset. Commitment fees received by the bank to originate a loan are deferred if it is probable that the bank will enter into a specific lending arrangement and are regarded as a compensation for an ongoing involvement with the acquisition of the financial instrument and recognized as an adjustment to the effective interest rate. If the commitment expires without the bank making the loan, the fees are recognized as revenue on expiry. 10

11 Loan syndication fees received by the bank are recognized as revenue when the syndication has been completed, only if the bank arranges the loan and retains no part of the loan package for itself (or retains a part at the same effective interest rate for comparable risk as other participants). Fees and commissions that are earned on negotiating or participating in the negotiation of a transaction in favor of another entity, such as arrangements for the allotment of shares or another financial instrument or acquisition or sale of an enterprise on behalf of a client, are recognized as revenue when the transaction has been completed. Administrative consultations and other service fees are usually recognized as revenue on a straightline basis over the period in which the service is rendered. Fees from financial planning management and custodian services provided to clients over long periods are usually recognized as revenue on a straightline basis over the period in which these services are rendered Dividends income Dividend income on investments in equity instruments and similar assets is recognized in the income statement when the bank s right to receive payment is established Purchase and resale agreements and sale and repurchase agreements (repos and reverse repos) Securities may be lent or sold according to a commitment to repurchase (Repos) a reclassified in the financial statements and deducted from treasury bills balance. Securities borrowed or purchased according to a commitment to resell them (Reverse Repos) are reclassified in the financial statements and added to treasury bills balance. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest rate method Impairment of financial assets The bank reviews all its financial assets, except those classified as at fair value through profit or loss, to assess whether an indication exists that these assets have suffered an impairment loss as described below: Financial assets carried at amortized cost At end of each reporting period, the bank assesses whether there is objective evidence that any financial asset or group of financial assets has been impaired as a result of one or more events occurring since they were initially recognized (a loss event ) and whether that loss event has impacted the future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Bank considers the following indicators to determine the existence of substantive evidence for impairment losses: Significant financial difficulty of the issuer or obligor. A breach of contract, such as a default or delinquency in interest or principal payments. It is becoming probable that the borrower will enter bankruptcy or financial reorganization. Deterioration of the competitive position of the borrower. The lender, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider. Impairment in the value of collaterals. Deterioration in the creditworthiness of the borrower. An objective evidence for impairment loss of the financial asset includes observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with an individual financial asset in the group. The Bank estimates the period between the date on which the loss event has occurred and the date on which the impairment loss has been identified for each specific portfolio. For application purposes, the bank considers such period to equal one. The bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant,in that field the below items will be considered: If the bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment based on the historical loss rates. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. An asset that is individually assessed for impairment but for which an impairment loss is not recognized is included in a group of other similar assets. If there is objective evidence that an impairment loss on loans and receivables or held to maturity investments carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced through use of an allowance account. The amount of the loss shall be recognized in profit or loss. If a loan, receivable or held to maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate(s) determined under the contract at the date on which an objective evidence for impairment of the asset has been identified. 11

12 As a practical expedient, the bank may measure impairment of a financial asset carried at amortized cost on the basis of an instrument s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective assessment of impairment, financial assets are grouped on the basis of similar credit risk characteristics that are indicative of the debtors ability to pay all amounts due according to the contractual terms. When assessing the impairment loss for a group of financial assets on the basis of the historical loss rates, future cash flows in the group are estimated on the basis of the contractual cash flows of the bank's assets and the historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The Bank ensures that estimates of changes in future cash flows reflect and are directionally consistent with changes in related observable data from period to period. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the bank to reduce any differences between loss estimates and actual loss experience Availableforsale financial assets At the end of each reporting period, the bank assesses whether there is objective evidence that any financial asset or group of financial assets classified as availableforsale has been impaired. According to the central bank of Egypt s rules, a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is an objective evidence of impairment. Such decline is presumed to be significant for the equity instruments if it reaches 10% of the cost of the financial instrument, whereas it is presumed a prolonged decline when it extends for a period of more than 9 months. When a decline in the fair value of an availableforsale financial asset has been recognized in equity and there is objective evidence that the asset is impaired the cumulative loss that had been recognized in the equity reserve shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. In respect of availableforsale equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized directly in equity. However if, in a subsequent period, the fair value of a debt instrument classified as availableforsale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss for that debt instrument Intangible assets Goodwill Goodwill, arising from the acquisition or legal merger of subsidiaries, represents the difference between the cost of the combination and the acquirer s interest in the fair value of the identifiable assets, liabilities and qualifying contingent liabilities of the acquiree at the acquisition date. Goodwill is annually tested for impairment and is writtendown to profit or loss at an annual amortization of 20% or impairment loss, whichever is higher Software (computer programs) Expenditure on upgrade and maintenance of computer programs is recognized as an expense in the income statement in the period in which it is incurred. Expenditures directly incurred in connection with specific software are recognized as intangible assets if they are controlled by the bank and when it is probable that they will generate future economic benefits within more than one year that exceed its cost. Direct costs include the cost of the staff involved in upgrading the software in addition to a reasonable portion of relative overheads. Upgrade costs are recognized and added to the original cost of the software when it is likely that such costs will increase the efficiency or enhance the performance of the computers software beyond its original specification. Cost of computer software recognized as an asset shall be amortized over the period of expected benefits from three to five years except for the core IT system that is amortized over ten years Property and Equipment The Bank s property and equipment include lands and buildings of the bank which basically comprise the head office premises and branches building. All property and equipment are carried at historical cost net of accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the construction or acquisition of the items. Subsequent costs are included in the assets carrying amount or recognized separately, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the bank and the cost of the item can be measured reliably. Repairs and maintenance expenses are recognized in profit or loss within "other operating costs" line item during the financial period in which they are incurred. 12

13 The Bank considers the residual value of its property and equipment as insignificant and immaterial in relation to the depreciable amount; therefore, the depreciable amount of the bank s property and equipment is determined without any deduction for residual values. Depreciation is charged so as to write off the cost of assets, other than land which is not depreciated, over their estimated useful lives, using the straightline method based on the following annual rates: Buildings Fixtures Leasehold improvements Decoration & installations Lifts Electricity & Air conditioning Generators Telephone network & CCTV Firefighting system & Plumbing system Other installations 50 years 10 years 15 years 10 years 30 years 10 years 10 years 10 years The shortest of 10 years or contract period Depreciation periods for property and equipment, other than buildings, depend on their useful lives which are usually estimated as specified below: Furniture Armored vaults IT equipment Electric appliances Vehicles 10 years 2030 years 5 years 5 years 5 years The bank reviews the carrying amounts of its depreciable property and equipment whenever changes in circumstances or events indicate that the carrying amounts of those assets may not be recovered. Where the carrying amount of an asset exceeds its recoverable amount, the carrying amount is reduced to its recoverable amount. The recoverable amount of an asset is the higher of the asset s net realizable value or value in use. Gains or losses on disposals are determined by comparing proceeds with relevant carrying amount. These are included in profit or (loss) in other operating income (expenses) in the income statement Impairment of nonfinancial assets Nonfinancial assets that do not have definite useful lives, except for goodwill, are not amortized. These are annually tested for impairment. Depreciable property and equipment are tested for impairment whenever changes in circumstances or events indicate that the carrying amounts of those assets may not be recovered. Impairment loss is recognized and the carrying amount of an asset is reduced to the extent that such carrying amount exceeds the asset's recoverable amount. The recoverable amount of an asset is the higher of the asset s net realizable value or value in use. For the purpose of estimating the impairment loss, where it is not possible to estimate the recoverable amount of an individual asset, the bank estimates the recoverable amount of the cashgenerating unit to which the asset belongs. At the end of each year, the bank reviews nonfinancial assets for which an impairment loss is recognized to assess whether or not all or part of such impairment losses should be reversed through profit or loss Leasing All lease contracts to which the bank is a party are treated as operating or finance leases as follows: As a lessee Lease payments made under operating leases, net of any discounts received from the lessor, are recognized as an expense in profit or loss on a straightline basis over the lease term As a lessor Assets leased out under operating lease contracts are reported as part of the property and equipment in the statement of financial position and are depreciated over the expected useful lives of the assets, on the same basis as other property assets. Lease rental income is recognized in profit or loss, net of any discounts granted to the lessee, using the straight line method over the contract term Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances due within three months from date of placement or acquisition. They include cash and balances placed with the Central Bank of Egypt (other than those required under the mandatory reserve), current accounts with banks and treasury bills, certificates of deposits and other governmental notes. 13

14 2.18 Other provisions Provisions for obligations, other than those for credit risk or employee benefits, due within more than 12 months from the date of separate financial statements are recognized based on the present value of the best estimate of the consideration required to settle the present obligation at the reporting date. An appropriate pretax discount rate that reflects the time value of money is used to calculate the present value of such provisions. For obligations due within less than twelve months from the date of separate financial statements, provisions are calculated based on undiscounted expected cash outflows unless the time value of money is material, in which case provisions are measured at present value. When a provision is wholly or partially no longer required, it is reversed through profit or loss under "other operating income (expenses)" line item Financial guarantees A financial guarantee contract is a contract issued by the bank as security for loans or overdrafts due from its clients to other entities that requires the bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial guarantees are generally issued by the bank to beneficiary banks, corporations and other entities on behalf of the bank s clients. When a financial guarantee is recognized initially, it is measured at its fair value plus, transaction costs that is directly attributable to the issue of such financial guarantee. After initial recognition, a financial guarantee contract issued by the bank is measured at the higher of: (I) (II) The amount initially recognized less, when appropriate, cumulative amortization of security fees recognized as income in profit or loss using the straightline method over the term of the guarantee; and The best estimate for the payments required to settle any financial obligation resulting from the financial guarantee at the reporting date. Such estimates are made based on experience in similar transactions and historical losses as supported by management judgment. Any increase in the obligations resulting from the financial guarantee, shall be recognized within other operating income (expenses) in the income statement Employee benefits Postemployment benefits (defined benefit plans) and defined contribution plans: The Bank is liable for all obligations arising from its plans for employee benefits which comply, in all material respects, with the principles set out below. Starting 1 January 2009, the bank has fully complied with the policy referred to below, and recognized any adjustments, resulting from the first full implementation of amendments to the CBE rules, directly on retained earnings. The Bank provides several postemployment benefits to its employees, such as the medical care scheme which qualifies as a definedbenefit plan. A defined benefit plan commits the bank, either formally or constructively, to pay a certain amount or level of future benefits and therefore bears the medium or longterm risk. The Bank recognizes the defined benefit obligation as a liability in the statement of financial position under "obligations for postretirement schemes" to cover the total value of such obligations. This is assessed regularly by independent actuary using the projected unit credit method. This valuation technique incorporates assumptions about demographics variables, staff turnover, salary growth rate and discount and inflation rates. When these plans are financed from external funds classified as plan assets, the fair value of these funds is subtracted from the defined benefit obligation. Differences arising from changes in the actuarial assumptions and estimates are recognized in the income statement as actuarial gains or losses to the extent of the higher of the following two amounts as of the end of the previous financial period: 10% of the present value of the defined benefit obligation (before deducting plan assets) and 10% of the fair value of the plan assets. Actuarial gains and losses that exceed the 10 percent criteria above are amortized to profit or loss over the expected average remaining working lives of the participating employees. Past service cost is recognized immediately to the extent that the benefits have already vested, and otherwise is amortized on a straightline basis over the average period until the benefits become vested. Annual cost of employee benefits plans is reported as part of general and administrative expenses (employee costs). Defined contribution plans are pension schemes whereby the bank pays defined contributions to an independent entity. The Bank shall not be under legal or constructive obligation to pay more contributions if this entity doesn t maintain adequate assets to payoff the employees benefits in return for their service in the current and previous periods. 14